Affordability isn’t following price drops
Out of 10 cities, only in Hamilton did homebuyers need less cash than they did last year
It’s a frustration that many aspiring first-time buyers have felt for months — and now new analysis from Ratehub.ca confirms it. Home prices may have dropped in Toronto, but you actually need to make more money to afford one compared to this time last year.
“The main takeaway is that even though home prices have softened, the rates have risen so much,” said James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender. “And homes are less affordable now than they were a year ago.”
His team crunched the numbers for 10 Canadian cities, including Toronto, and found that in every one except Hamilton, more income was required to purchase in January 2023 than 2022.
The company used average home prices from the Canadian Real Estate Association MLS Home Price Index and assumed a 20 per cent down payment with a 25 year mortgage, and an average of five year fixed rates from the Big Five banks.
In Toronto, the average home price has dropped $178,600, from $1,257,500 in January 2022 to $1,078,900 in January 2023. But with the stress test, which requires buyers to qualify at a rate of 5.25 or two per cent more, whatever is highest, and an average rate of 5.37, buyers now need to qualify at 7.37 per cent. This means they need to make $207,000 — $7,620 more than the $199,380 they needed to make in January 2022.
“First time home buyers are struggling more this year than let’s say last year to enter the market,” Laird said. Many of them will end up just waiting and hoping that prices will drop more or interest rates will start to fall at some point.
“This might provide more pressure for further home price drops this year, if enough people stay on the sidelines,” he said, although this also depends on other factors such as immigration and interest rates.
Toronto is actually closer to the neutral point than other cities, such as Victoria, where home prices dropped by only $11,800, and the income required to purchase rose by $25,500. But it’s definitely not more affordable now.
Hamilton is the only place where it is, as average home prices have dropped from over $1 million to just over $800,000, the biggest change in any of the 10 Canadian cities Ratehub.ca analyzed.
“That drop in average home value was enough to overcome the higher rates and make the net result more affordable in Hamilton,” Laird said.
“You could look to that as an example of what first-time home buyers would be hoping to see as far as value drops in the other cities so that there’s net more affordability.”
Ira Jelinek, a sales rep with Harvey Kalles Real Estate, agrees that the market has become more unaffordable, not only for homeowners but for renters as well.
“It’s a total Catch-22” for firsttime buyers, he said.
But, he added, he doesn’t see the GTA or even the Toronto market as consistent. Instead, it’s more of a “tale of two cities” with prices still very competitive in “blue chip” neighbourhoods like Forest Hill, Summerhill and Rosedale.
Jared Gardner, a sales rep with RE/MAX, said he will always have a soft spot for first-time buyers, as he remembers how difficult it was to buy his first home, even though the price range was “in the 200s” two decades ago.
He advises first-time buyers to adjust their expectations, and consider buying a condo or townhouse, or purchasing out from the city core.
“When the market went up crazy amounts, it was tough for first-time home buyers because they couldn’t keep up with the down payment in order to buy,” he said. “And now it’s just as tough.”